[Marxism] Soros warns of super-bubble
lnp3 at panix.com
Sat Jun 21 15:17:27 MDT 2008
From Doug Henwood on lbo-talk
Wall Street Journal - June 21, 2008
Soros, the Man Who Cries Wolf,
Now Is Warning of a 'Superbubble'
By GREG IP
He has cried wolf many times, but this time George Soros says the
beast is really upon us.
Mr. Soros, the chairman of Soros Fund Management, is best-known as a
speculator, philanthropist and political activist. He made a fortune
by doing things such as betting against Britain's currency in 1992
and Thailand's in 1997.
A Hungarian refugee, he has spent millions to promote democracy and
learning in post-Soviet nations. He also has spent heavily to promote
liberal causes and has been an ardent critic of President Bush.
But Mr. Soros, 77 years old, wants to be remembered most as a
philosopher. Since he was a student in 1952, he has been promoting
his economic theory, which he calls "reflexivity."
In essence, he argues that markets don't simply reflect fundamental
determinants but can change those determinants in a way that causes
asset prices to go to extremes. In his latest book, "The New Paradigm
for Financial Markets," he argues a "superbubble" has developed in
the past 25 years and it is now collapsing.
Mr. Soros's predictions in his books have fallen far short of his
track record as a hedge-fund operator. In 1987 he wrote that the
world had to ditch the dollar in favor of a new international
currency system or risk "financial turmoil, beggar-thy-neighbor
policies leading to world-wide depression and perhaps even war." His
1998 book said, "The global capitalist system ... is coming apart at
In recent interviews in Washington and New York, The Wall Street
Journal asked him about his forecast, why he succeeds financially
when his world view has been wrong, and his aspirations to be a
WSJ: You've said this is the worst financial crisis since the Great
Depression. Yet at its worst, the stock market was only down 18%.
That doesn't seem Depression-like. Is this as bad as it gets?
Mr. Soros: I think that the decline in housing prices is going to be
more precipitous and go further than people currently expect. To
expect [to come] out of the recession by the end of the year, I find
But I can envisage a very broad range of scenarios. One would be a
very prolonged world-wide recession. I cannot imagine a replay of the
'30s. But you can have a muddle-through replay of the Japanese
scenario, 10 years of stagnation.
The employment figures are still very, very satisfactory. Part of
this is due to the impact of the lower dollar in stimulating exports
and partly to the very strong position of the corporate sector. The
economy turned out to be structurally in very good shape.
WSJ: You argue that the crises we've experienced in the past 25 years
have been, in retrospect, "testing events" that convince us the
system is stable, encourage us to take even bigger risks, leading to
one, cataclysmic collapse. Could this be just another testing event?
Mr. Soros: Each time the authorities saved us, that reinforced the
belief that markets are self-correcting. Each time when you bail out
the economy, you need to find a new motor, a new source of credit and
a new instrument that allows for the credit expansion. [It's]
difficult to imagine what you can do when you are already lending
effectively 100% on inflated house prices.
I have a record of crying wolf at these times. I did it first in "The
Alchemy of Finance" [in 1987], then in "The Crisis of Global
Capitalism" [in 1998] and now in this book. So it's three books
predicting disaster. [After] the boy cried wolf three times ... the
wolf really came. If we can sail through this without a recession,
then the superbubble story is seriously impacted ... I [will] have
cried wolf again. Unfortunately, if you go into a recession, [it is
not] proof of reflexivity, or vice versa.
WSJ: How is that you are rich despite your world view having been
wrong so far?
Mr. Soros: I'm only rich because I know when I'm wrong.
WSJ: How do you stay levelheaded in the middle of a bubble?
Mr. Soros: I don't. I panic. The same thing applies to me as to
everybody else, so I'm given to euphoria and despair. And I would say
that I basically have survived by recognizing my mistakes. I very
often used to get backaches due to the fact that I was wrong.
Whenever you are wrong you have to fight or [take] flight. When [I]
make the decision, the backache goes away. I don't always make the
right decision. I sometimes cut my losses when I shouldn't.
WSJ: Is reflexivity really behind your success, or are you just a
Mr. Soros: My performance currently is not that good, but taking the
longer [view] it is kind of outstanding. There are two possible
explanations. One is the theory [of reflexivity] and the other is the
backache. And I think it's really the combination of both because
recognizing reflexivity drives you to this constant re-examination.
WSJ: Would you prefer to be remembered as a philosopher than as a
successful speculator or philanthropist?
Mr. Soros: Much more. You know, people have hang-ups and that's my
hang-up. The most popular reaction to my philosophy is ... success
has gone to his head and he wants to be more than what he is. That's
obviously a very plausible theory. Certainly being a successful fund
manager gave me a platform. But I would like the ideas to be judged
on their own merit.
I think I'm on the verge. For the first time, this book [his 10th] is
a best seller. I was asked to testify [before the Senate Commerce
Committee] because a staff member read the book.
WSJ: Are you getting recognition from heavyweights in academia or
Mr. Soros: It has certainly not penetrated academia, and not policy
makers either. There was an article in The Wall Street Journal about
people doing research on bubbles at Princeton, so I'm going to meet
with one of them. I wish I could engage in a discussion with [the
Federal Reserve]. I'm waiting for a phone call. I'm [meeting with]
WSJ: But you are quite critical of Greenspan.
Mr. Soros: Greenspan is one of the great manipulators of financial
markets. I mean it in a good way. He managed [in 2001] to forestall a
more serious recession. He kept interest rates [low] too long. And he
did not heed the warnings that lending standards were being lowered,
that deceptive practices were being used. He was too much of a market
fundamentalist. He believed that if you leave it to markets,
everything will be all right. That's initially self-reinforcing, but
WSJ: Greenspan argues that the benefits of innovation are worth the
Mr. Soros: This is, of course, [Joseph] Schumpeter's creative
destruction idea. However ... going overboard in generating change is
not necessarily a good thing. Financial innovation may not be an
unmixed blessing because it really prevents proper regulation.
If you look at the 19th century, you had creative destruction going
on, one financial crisis after another. But each time you had a
crisis, you had an examination of what went wrong, and you put in
some instrument or some institution to prevent it from happening.
I'm not advocating ... central planning because that's worse than
markets. But the regulators need to learn from the mistakes that they
have made. I think it's pretty clear that you've got to accept
responsibility for moderating asset bubbles. ... That involves
regulating credit as well as [interest rates].
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